A Case Study In How COVID-19 has Affected Wood Products Supply Chains

A Case Study In How COVID-19 has Affected Wood Products Supply Chains

Malaysia’s Response to COVID-19 and the State of its Timber Industry

The world had yet to fully recover economically from the post-2009 Global Financial Crisis (GFC) when it was hit by a bigger challenge in the form of the Coronavirus 2019 (COVID-19) pandemic—one of the worst “black swans events” the world has experienced. The World Bank is estimating the global Gross Domestic Product (GDP) to be hit harder than even the GFC, going deeper into the negative territory as more countries struggle to contain the pandemic.

Lockdown Measures and The State of Malaysian Economy

Malaysia’s response strategy against COVID-19 centered on its 6R recovery plan–Resolve, Resilience, Restart, Recovery, Revitalise and Reform–where lockdown measures fell within the “Resolve” stage which involved the Movement Control Order (MCO), Conditional Movement Control Order (CMCO) and Recovery Movement Control Order (RMCO) which has been extended through 2020.

The restrictions imposed on March 18 to May 3, 2020 covered, among others, the general prohibition of social activities and gatherings. Travellers were restricted from going to Malaysia, while outbound travels by Malaysians were also restricted and returning citizens were subjected to a 14-day quarantine. Schools and other government and private premises were closed with the exception of a number of “essential” sectors and services with many operating at half capacity with strict adherence to health and hygiene standard operating procedures (SOPs) set by the Ministry of Health.

SOURCE: WORLD BANK

Next came the CMCO stage that relaxed most of the restrictions as most economic sectors were allowed to operate. Businesses were required to enforce social distancing policy at their premises and set up a contact tracing measure by recording the details of their customers and/or workers. Most social activities were still restricted except for non-contact sports and small gathering of not more than 10 persons. Interstate travel was also restricted to avoid cross-infection among high-risk and low-risk states.

Currently, Malaysia is in the RMCO stage–the fourth stage of the 6R recovery plan–where it is geared towards reviving the economy for the short-term once the infection rate of COVID-19 is under control. Under the RMCO, almost all economic and social activities, including interstate travel are allowed while observing the usual new normal SOPs. However, mass gathering and activities with mass audience are still banned.

Malaysia was also affected by the disrupted global supply chains due to lockdown measures imposed at different times by its major trading partners Singapore and China which act as important logistical and import-export hubs. Businesses in the country were reportedly losing as much as RM2.4 billion (USD 550 million) every day when Malaysia imposed the Movement Control Order in March.

The impact of MCO was directly reflected in the IHS Markit Malaysia Manufacturing Purchasing Managers’ Index (PMI) which dipped below 50.0 (denoting a more severe contraction in manufacturing activity) in January (48.8), February (48.5), March (48.4), April (31.3), and May (45.6) as concerns grew about the lockdown situation and deteriorating global trade and consumer confidence. The situation improved with the index showing an expansionary trend by June (51) and July (50). Taking all the global economic factors into account The World Bank, in its June 2020 Global Economic Prospects, has estimated Malaysia’s economy will shrink by 4.9% in 2020.

Government and Private Initiatives

The government of Malaysia recognised the threat of COVID-19 to the economy and its people, starting from the first positive cases back in January 2020 and had taken measures to support businesses and salaried persons to temporarily insulate them from the abrupt negative impacts of the pandemic and MCO.

The over RM260 billion (USD59.6 billion) PRIHATIN stimulus package worth 17% of the country’s GDP, included deferment/exemption of statutory contributions, tax, and levy; reduction of operating cost; and financing facilities/relief, among others. The Malaysian government injected further assistance to businesses through the PENJANA Short-Term Economic Recovery Plan worth RM35 billion (USD8 billion) as Malaysia entered the “Recovery” stage of the 6R Recovery Plan. The plan expands the coverage of the earlier stimulus plans for the benefit of micro businesses and SMEs.

A COVID-19 recovery fund through the issuance of Sukuk Prihatin (a financial certificate similar to a bond in Western finance) is worth RM500 million (USD117.2 million) with a profit rate of 2%. The proceeds from this programme will contribute, among others, towards financing micro SMEs, particularly women entrepreneurs.

Timber Industry

The timber industry in Malaysia received a special approval to continue operating during MCO. As of 4 May 2020, more than 30% of the timber-based manufacturers and processors had received the approvals to operate.

The Malaysian Timber Council (MTC) played an active role in getting, analysing, and channelling feedback from the industry on issues related to the MCO to the relevant ministries and agencies for further action in facilitating the smooth operation of the timber industry. The Council also worked closely with the Ministry of International Trade and Industry (MITI) and the Malaysian Timber Industry Board which helped evaluate and approve the companies to operate during the MCO.

SEVERAL CONSULTATION SESSIONS ON MANAGING THE IMPACT OF THE COVID-19 PANDEMIC WERE HELD WITH MAJOR TIMBER ASSOCIATIONS AND KEY INDUSTRY PLAYERS. AMONG THE CONCERNS HIGHLIGHTED WERE THE SLOWING GLOBAL AND DOMESTIC DEMAND, CASHFLOW MANAGEMENT, ORDER FULFILLING ISSUES, SUSTAINING WORKFORCE, AND LOSING BUSINESS TO COMPETITORS.

MTC had also conducted an industry-wide survey on the impact of MCO on the Malaysian timber industry in April 2020. The majority of the respondents were SMEs employing between five to 75 employees and earning between RM300,000 to RM3 million annually.

The respondents ranked the issue of loss of income as the top impact of COVID-19 and the MCO. This was followed by financial challenges, unable to fulfil existing orders, difficulty in obtaining raw material/components, postponement of orders and staffing problems.

Manufacturers also cited the availability of raw materials and input components as problems. Most of the companies employed cost-saving measures which included changing their business models, downsizing, diversifying their business into other sectors or increasing their product range, diversifying sources of raw material and components as well as embarking on digital transformation.

MTC conducted another survey from 1 to 2 June 2020 where 90% of the companies surveyed had resumed operations whereas 60% respondents replied that they were operating at more than 70% capacity. The survey also found that 63% of the respondents had resumed export activities with the US, Japan and Australia being the top three destinations.

Several consultation sessions on managing the impact of the COVID-19 pandemic were also held with major timber associations and key industry players. Among the concerns highlighted were the slowing global and domestic demand, cashflow management, order fulfilling issues, sustaining workforce, and losing business to competitors.

The survey findings and consultation discussions have been crucial towards MTC making a drastic change to its operation model and revising its activities for 2020 to help the timber industry build resilience during this crisis and sustain businesses. MTC has recalibrated its budget to focus on initiatives that will increase the timber industry’s productivity and capabilities as well as to leverage on digital platforms and channels for more effective promotional and communication programmes.

Way Forward

The global economic landscape will remain challenging until a reliable vaccine to COVID-19 is found and mass produced. The timber industry in Malaysia will also experience the downturn cycle. However, with the right corrective measures in place, businesses can remain viable. The government of Malaysia has signalled of more assistance to stimulate the economy and businesses to weather the storm once it has assessed the impact of the PRIHATIN Stimulus Package and PENJANA Short-Term Economic Recovery Plan.

MTC, too, in line with the aspiration of the country, will continue to take necessary measures in view of the challenges faced by the timber industry, to sustain its business and emerge more resilient after the crisis.